De-(odd)-couple

It’s been a quiet start to the week, with stocks, bonds and currencies consolidating after Friday’s explosive moves. The equity consolidation was perhaps foreshadowed by the recovery of US equities into the close on Friday, a move for which Macro Man has not heard a satisfactory explanation. Nevertheless, the portfolio has started the month on the front foot, with the currency and stock index positions contributing strongly. Macro Man took a bit of EUR off the table on Friday, and will look to re-establish on dips early in the week. The main event of the week is, of course, on Friday, with the release of the market-moving but statistically insignificant non-farm payroll numbers. Of interest to Macro Man will be the unemployment rate, as we probably need to see that inch back towards 5% before the Fed would seriously contemplate a rate cut.

A phenomenon that Macro Man is encountering with increasing frequency is the market’s infatuation with the notion of decoupling. While it is fairly clear that the US has slowed, many economists remain happy to forecast above-trend growth in Europe, Japan, and of course China over the coming quarters. Central bankers in Europe and Japan appear comfortable with the notion, as evidenced by recent comments from the ECB and BOJ governor Fukui’s reported campaign to push through a December rate hike.

While the jury is still out of European growth after next month’s VAT hike in Germany, Macro Man is somewhat surprised at how upbeat the market appears on Japan. When one considers the hype over the sub 50 ISM, one wonders why no one has focused on the Japanese leading indicator, which would suggest that a manufacturing recession is in the pipeline:Machinery orders also suggest at least a stagnation in industrial output, which would obviously have implications for capex. Meanwhile, while everyone waits for the US consumer, run over by the housing market, to squeal in pain, it is the Japanese consumer that has rolled over and died...

Moreover, one cannot read a piece of FX research without seeing a reference to Japan’s REER being at 20 year lows. This begs the question: if the yen is so cheap and consumers aren’t spending, why isn’t Japan’s trade surplus any higher?

Ironically, if Macro Man’s fears on Japanese growth prove correct, this could be a bullish outcome for the yen if it forces Japanese retail to rein in their selling of the domestic currency. Next week’s Tankan will provide clues as to whether the US and Japan de-couple or instead prove to be an odd couple vis-à-vis the rest of the world.